Krugman’s blog, 5/28/13

1. I am a big meanie
2. Reinhart and Rogoff never should have claimed that there is some kind of critical threshold at 90 percent, and they certainly should disavow any such claim now (which I don’t think they have, yet). I believe that the 90 percent claim had a remarkably malign effect on policy discussion, but let’s look forward.

And to start that forward look, let’s talk about German fiscal policy and European monetary policy.

From the point of the euro area as a whole, fiscal policy has been dramatically and destructively “procyclical” — that is governments have slashed spending and raised taxes in the face of a deeply depressed economy. This is a large part of the reason Europe is back in recession, and that growth over the period 2007-2013 looks more or less certain to end up being lower than growth over the period 1929-1935. (And the 2014/1936 comparison will probably be even worse).

But the peripheral countries don’t have room for stimulus (although I think you can argue that they have room for reduced austerity). This means that any attempt to make European fiscal policy less contractionary has to involve expansion in the core, mainly Germany.

R&R are opposed to any such move, however, because

for Germany, which can afford it, fiscal expansion would be procyclical.

Their point is that Germany appears to be near full employment, so that fiscal expansion would be inflationary there. And they call for expansionary monetary policy instead.

OK, this baffles me, on two-and-a-half levels.

First, the half level: what, exactly, does it mean to call for expansionary monetary policy by the ECB? Like other major central banks, the ECB has near-zero policy rates, so we’re talking about some kind of unconventional monetary policy. Are we supposed to envision the ECB doing huge purchases of unconventional assets (over and above what it’s already doing in the form of lending to banks against sovereign debt and the promise of outright monetary transactions if necessary)? Alternatively, are we supposed to see a European version of Abenomics, with the ECB credibly committing to a higher inflation target? Both are strategies worth trying, but of uncertain effect — and both would surely be viewed as anathema by the Germans.

Second, and now we get to where I’m really baffled, if we’re against policies that are procyclical for Germany,what on earth do R&R imagine a more expansionary monetary policy (however achieved) does? Europe as a whole is deeply depressed; Germany is not. So any policy that causes overall European expansion is going to be pushing the German economy up against capacity, and pushing up German inflation. There is no difference at all between fiscal and monetary expansion as far as that issue is concerned.

Finally, aren’t policies that are procyclical for Germany, and raise inflation there, the whole point of the exercise? We have a competitiveness gap between the periphery and the core that must be closed through some combination of falling wages in Portugal, Spain, etc. and rising wages in Germany. The idea is to shift the balance of that adjustment somewhat away from the deflationary countries — overheating in Germany isn’t a bug, it’s a feature, and indeed the crucial feature.

So I have no idea what their point is. I get that they’re against fiscal expansion anywhere in Europe despite the continent’s clearly too-tight overall fiscal policy, but I don’t understand why.

The second post of the day was “Taxing the Rich:”

For my sins (and, yes, an honorarium too), I’m doing this. So it’s worth putting out some of the basics.

First, over the past three decades we’ve seen a soaring share of income going to the very top of the income distribution (right scale) even as tax rates on high incomes have fallen sharply, with the recent Obama increases clawing back only a fraction of the previous cuts:

Second, there is now a lot of hard empirical work on the incentive effects of high top tax rates. None of it shows the kind of huge negative effects that figure so prominently in right-wing rhetoric. In particular, none of it suggests that we are anywhere close to the point where raising taxes on the rich would reduce revenue as opposed to increasing it.

Finally, you can use the results of these studies to estimate the “optimal” tax rate on top incomes; I think the best way to think about what optimality means is, what’s best for the 99 percent, since the 1 percent will be doing fine regardless. And just about everything points to substantially higher tax rates than we now have.

This has nothing to do with envy, or a desire to punish the rich, or anything other than a recognition of tradeoffs: if we choose to raise less revenue from the rich than we can without hurting the economy, we will be forced either to raise more taxes from or provide fewer valuable services to everyone else.

The last post of the day was “A Brief, Useless Note On Being Bashed:”

Fairly often I receive comments or other communications asking me to respond to X or Y, who has said Z about me and/or my arguments. For the most part, I am not going to oblige. Why?

The main answer is, sheer capacity constraints. In case you haven’t noticed, Krugman-bashing is a huge industry — so huge that I would feel guilty about diverting so many productive resources from other activities, if it weren’t for my strong suspicion that most of these resources would in fact be destructive in whatever else they might be doing; so I’m actually providing a public service by keeping these guys busy.

One Response to “Krugman’s blog, 5/28/13”

I assume Mr. Krugman wrote the article on the Weimar Republic and much can be disputed but I wouldn’t waste my time on how many cycles fit on the tip of a pin. How instead does Mr. Krugman feel about the stock market climb and subsequent “pull back” in light of the improvement in the economy. Oh yes there are millions unemployed but don’t torture us with that numbing calculation. That is more a subject fit for ethicists and if there aren’t any they should invest a chair at Princeton to decide how much a CEO can make while squandering a municipalities bond backing.

Given reports of record banking profits and truck production by American motor manufacturers and the previous huge by any measure of profits made at CAT and JOY and DE how can the government afford to sustain Merrill and BoA under the guise they need to be able to borrow at the window for nil? That’s not a question accurately put but self described nevertheless. The SSA Trust fund and the Fed are bloated with markers from Lockheed and GEICO but no mention of that. The economy is more than board room rumors and DOL numbers. Numbers. Hah. They make them up.

If no one can put Humpty together again with the stimulus and let’s face it the Fed has never been able to avoid inflation after stomping the life out of middle America’s savings account than why bother when the congress can’t find it’s head in a duffle bag to loosely rephrase Joe Piscopo’s movie title.

The only thing we can agree on is that highways, airports, bridges and tunnels are only important when they go by the home of a vice president or other dignitary. That’s a laugh. If we are lucky to be here in the US, and we are of that there can be no doubt, than we are equally unlucky to be twisted around a flagpole by the likes of Boehner and Mitchell, Beck and O’Reilly. I have no clue how people can be so stupid and proud simultaneously. But I do know that the budget balancing act is fraudulent. And that the post VN war federal government can not be depended on to solve problems while it can’t keep its own members in check. There ought to be an intelligence test to be a congressman or SES. There isn’t. No one knows where the jobs will come from. No one except the likes of the peoples who create corporations out of nothing. And they’re not depending on stimulus. It has served its purpose. It succeeded by all accounts at least by a measure of non degression. I don’t have a solution. But I do believe that no one else does either. Perhaps too much power is vested in congress and the monied class. But revolutions are bloody and we have had our share The only thing that I know will help is broader measures of education so better decisions can be made by the body politic.

By all accounts Mr. K. there is no labyrinth where interest rates rise and fall with spending.